In my Friday letter, Thoughts from the Frontline, I wrote, "This week's events have made it clear why as investors you need to be able to get a handle on world events." The turmoil in the Middle East has only intensified since then, making the markets start off the week in the midst of geopolitical uncertainty.
I think you will find it interesting to read today's note from Stratfor on the Mid-East situation. Strategic Forecasting, Inc, or Stratfor for short as I noted last Friday is my single best source for geo-political news. The company is headquartered in Austin, TX with a satellite office in Washington, DC and intelligence sources from around the world. Stratfor focuses on providing corporations, governments and individuals strategic intelligence on the economic, political and security issues that will affect them.
George Friedman, the President of Stratfor, has written an up-to-date piece on how the Israeli/Hezbollah conflict is likely to unfold. With oil in the mid 70's and the Fed facing tough decisions, investors must be on their guard with yet even more volatility from geopolitical concerns. I trust that you will find this alert to be quite "Outside the Box" compared to what the traditional media is reporting.
I have gotten them to reduce their normal subscription rates to $199 for the next few days. You can subscribe by going to https://www.stratfor.com/offers/060522-milrate/?ref=060522-milrate-BMG&camp=060522-milrate
. Once again, if you need a real source of information on what is happening in the world, especially if you are in the money management business, you should subscribe.
John Mauldin, Editor
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Red Alert: Confusion Before the Storm
By George Friedman
There was some major confusion a couple of hours ago. First, an Israel Defense Forces (IDF) spokesman told the wire services that Israeli troops had entered southern Lebanon. Then IDF officials denied it. Then it was announced that bulldozers had gone in and had been withdrawn. We went from thinking the invasion had begun to that it hadn't to "what in the world is going on?"
Our best guess at the moment is that the bulldozers went in to clear mines and other obstacles prior to the main body of Israeli forces crossing over tonight. Another explanation might be that this was a probe designed to draw Hezbollah fire. The Israelis are clearly worried that Hezbollah has obtained advanced weaponry from Iran via the sea and Syria. They don't seem to be sure what has arrived and what has deployed with Hezbollah forces, but they don't want to push across the border only to have their armor caught in a hail of advanced anti-tank missiles or trapped by advanced anti-tank mines. There also could be an element of psychological warfare in this confusion. Hezbollah knows Israel is coming but doesn't know when -- and Israel wants to rattle its fighters as much as possible.
All of this is possible, but the fact is that major Israeli forces have not crossed the border into Lebanon as of afternoon July 17, local time. The Israelis did announce they were calling up a reserve division over the weekend. Meanwhile, Israeli aircraft are continuing intense operations over Lebanon. More Hezbollah rockets started hitting Israel after daybreak July 17. This obviously creates some urgency for the Israelis. The airstrikes have not succeeded in shutting down rockets that can reach as far as Haifa, and the Israelis have acknowledged that Tel Aviv is at risk as well. Therefore, where we have expected Israel to move as soon as possible, it has not yet committed forces on the ground.
One explanation could be that the Israelis simply are not ready to move yet. Deploying a force suitable for the mission takes time. The call-up of the reserve division by headquarters indicates that this is to be a substantial operation. The Israelis might not want ground forces to go until they are completely ready, and thus are prepared to absorb the additional hours or days of missile attack to make sure the attack is decisive.
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A second possible explanation is that although the Israelis have lost any element of strategic surprise -- Hezbollah certainly knows they are coming -- they are hoping for some tactical surprise. The longer they delay, the less certain and more weary Hezbollah becomes. It is not clear, however, whether the advantage tied to any possibility of tactical surprise is worth the incoming missiles.
Third, it could be that the air campaign is not yet complete. Israel, like the United States, likes to shape the battlefield by running extensive air campaigns. There could be too many targets for such a campaign to have run its course yet, or the targets might be more robust than expected. The Israelis could be hunting for the longer-range missiles that Hezbollah has, fearing that an invasion before these are destroyed would invite a launch at Tel Aviv -- something they don't want to see.
Yet another reason for the delay might be something that Russian President Vladimir Putin hinted at July 16, when he said Russians had been negotiating for the release of the three kidnapped Israeli soldiers and that he did not feel the negotiations had been unsuccessful. Israel does want the soldiers returned. But while Hamas might consider releasing the captives in its custody, it is hard to believe Hezbollah would -- not if, after releasing them, Hezbollah would still face attacks.
There is massive diplomacy under way, and Israel is doing well. Not only is the United States lining up with Israel, but the sense at the G-8 summit in St. Petersburg, Russia, was much less hostile to Israel than normal. In addition, both the Saudis and Egyptians have made it clear that they hold Hezbollah responsible for what has happened. Given this, it is not inconceivable that some diplomatic process is actually moving forward.
The problem with that scenario is that any diplomatic settlement to the crisis not only would preserve Hezbollah in some way, but would depend on Hezbollah implementing an agreement. The Israelis see the situation that has erupted in recent days as a rare opportunity to deal with Hezbollah, and they have no trust in diplomatic arrangements or their enforcement by mediators. They do want their soldiers back, but not at the risk of leaving Hezbollah in place.
The fighting is hardly tapering off. Israel's aircraft are ranging over Lebanon, a blockade is in place, and Hezbollah is firing at northern Israel quite effectively. Israel will not willingly leave Hezbollah in place while it has such capabilities. The Israelis might leave all this to airpower, but the fact is that the Israeli army has no confidence in the air force's ability to definitively destroy Hezbollah. The view is that, in the end, they will have to go in on the ground.
It is interesting to note, however, that the United States is being surprisingly relaxed about getting American citizens out of Beirut. Obviously, it can't get everyone out, but unlike other countries, the United States has been slow to move, in spite of the obvious risk of hostage-taking. U.S. Embassy officials in Beirut seem to be acting as if they have more time -- and certainly the United States knows if and when Israel is going to invade.
Our view is this: Israel will not accept the bombardment that is under way. Any cease-fire, from the Israeli point of view, would simply be a postponement of the issue. Prime Minister Ehud Olmert's government does not have the political freedom for action that a cease-fire requires. There is rare consensus in Israel that Hezbollah must be attacked. If Olmert settles for a diplomatic solution, he will have serious problems in the Knesset.
Therefore, it follows that the most likely explanation for the delay in a ground assault is that the Israelis are going to take some more time in deploying their forces at the border, allow the air campaign to continue for another day or two, accept the civilian casualties from Hezbollah's rockets and strike back some time this week. But with those rockets coming in, they don't have that many days to wait. Israel's government is not fractious. There is no sense of unease about the situation. Therefore, we have to stay with the view that a broader ground attack is likely early this week.
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Your praying for Peace in the Mid-East analyst,
John F. Mauldinjohnmauldin@investorsinsight.com
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07-17-2006 9:17 PM